The NCLT Chennai is soon expected to announce its order on Siva Industries and Holdings case. On June 24th, NCLT had reserved its order on withdrawal of insolvency application by resolution professional on behalf of lenders, led by IDBI Bank. Lenders want to settle the Rs 4863 Cr case against Siva Industries through one time settlement.   

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During the hearing, NCLT bench came down heavily against the lenders on rationale for settlement of dues of Rs 4863 Cr for a meager sum of Rs 323 Cr which is only 7% of the outstanding amount. The decision of the NCLT is keenly awaited. If this application is rejected, then this decision will dissuade future questionable settlement plans by lenders in other cases as well.   

 The most crucial part of NCLT decision will be in regards to whether application for withdrawal can be allowed under Section 12A of IBC? During proceedings, the bench questioned whether this settlement scheme is a resolution plan in disguise. If so, then Section 29A of IBC comes in play. Section 29A bars any resolution plan from defaulters. In this instance, the scheme of settlement is not proposed directly from C Sivasankaran, but by his father. So, it is imperative that the veil must be lifted to discern the actual beneficiary of the scheme.    

  In reference to section 12A and 29A of IBC, Sterling Biotech case was cited during the hearing. NCLAT had approved Sterling Biotech’s one time settlement plan, citing if 90% lenders voted in favor of settlement, than section 29A is not applicable. Lenders also argued that the settlement amount of Rs 323 Cr is above the liquidation value of Rs 229 Cr.  

  During the hearing, one of the lenders of Siva Industries- SBI pointed out that bank had declared Sivasankaran as defaulter. SBI is against proposed settlement plan, as the bank’s amount of mortgaged asset is Rs 32 Cr which is higher than the amount being offered under the settlement of Rs 27 Cr.     

  NCLT had observed that such one-time settlement proposals will not only set a bad precedent, but it will also go against the ethos of Insolvency and Bankruptcy Code (IBC). Experts strongly believe that if acceptance of such proposals becomes a norm by bankers, to avoid the lengthy and time consuming process under the IBC, then it will become incentive for defaulters and entire purpose of IBC will get defeated.    

  NCLT bench has further questioned the alacrity of IDBI Bank to settle this matter. CBI has charged Sivasankaran in a separate loan case of Rs 600 Cr involving IDBI Bank officials. CBI had registered the case in 2018 and had charged 15 officials of the IDBI Bank along with Sivasankaran.   

  The said case is of Sivasankaran’s Finland based company that had taken a loan from IDBI Bank and had later defaulted. Said company also went into bankruptcy in Finland. It is alleged that then IDBI Bank officials had sanctioned a new loan to repay the previous loan, which is against the rules of RBI. Banks can’t approve new loan to a defaulting company to repay the old loan. Alarmingly, the IDBI bank is ready to settle the loan of the Sivasakaran’s group against a meager amount. Though in reply IDBI Bank said that bank has consent of CBI for the one time settlement proposal.   

  Bench also stated its surprise on the ‘commercial wisdom’ argument of lenders.  In support of their withdrawal of application, lenders have argued that settlement under one-time settlement is in accordance with commercial wisdom and should not be doubted or questioned. To this argument, bench said that it must be noted that lenders’ wisdom can’t be above the law of the land.   

 Bench asked whether the members of Committee of Creditors (CoC) are empowered by their respective boards to approve such huge haircuts ? In answer to this query, lenders replied in affirmative. Though, this goes against normal business decision process. Usually, items of even few hundred crore go to bank’s board for approval. But, in CoC, mid-level bankers approve haircuts amounting to thousands of Cr.     

  NCLT bench also wanted to understand what gives lenders the confidence that they will really get the amount promised under One Time Settlement and what if the proposer of the settlement fails to pay? To this lenders replied that they have checked the financial status of the proposer.   

 Bench was also curious about the real intent of the proposer, because Vallal RCK who came with the offer of settlement is no ordinary shareholder of the company but the father of C Sivasankaran.  Bench asked if the father was going to take control of the company and then gift it to his son? If that’s the case, then it is against the intent of IBC. The bench then asked the lenders how this settlement was not a resolution in disguise and a “backdoor entry for the promoter”.      

During the hearing, bench had questioned the neutrality of the resolution professional and asked if he was siding with the promoter group to which the resolution professional relied in negative and said he was merely performing his duty.       

In 2019, the NCLT had admitted proceedings under Insolvency and Bankruptcy code against the Sivasankaran promoted Siva Industries and Holdings in a plea filed by lead lender IDBI Bank Ltd.    

The process of IBC is facing criticism because of huge haircuts, allegations of nexus of resolution professionals, lenders and promoters, backlog of cases when it was a promise to be a time bound resolution.